Bigtech and regulation driving banking transformation
Emergence of bigtech in financial services not gone unnoticed by regulators
ADVANCED in consolidating, analysing and using clients’ data large established technology companies, or bigtechs, are now turning their attention to financial services. While this drives innovation, the very distinct business models employed by bigtechs also trigger regulators’ vigilance around potential gaps when it comes to competition and data protection rules, according to a white paper published by Deutsche Bank.
Entitled "Regulation driving bank transformation", the white paper assesses the impact of three key trends in the financial industry, calling for a regulatory environment that supports the safe and robust development of each. These trends are: the rise of FinTechs, the evolution of the crypto-assets market, and BigTechs offering financial services which is the focus on this article.
On the regulation of BigTechs, the white paper says that the increasing use of cloud services and AI platforms are two of the most prominent ways in which bigtech firms have become enmeshed with the financial industry, making them vital to certain banking operations.
By providing near-unlimited hardware and software resources on a global and pay-as-you-go basis, cloud computing is driving down costs and creating greater flexibility to respond to change. This allows technology infrastructure to be scaled up and down as required, and drive new products to market.
This service dependence is reciprocal. Even though some of the largest bigtech companies like Facebook, Google and Amazon offer financial services, including payments, money market funds, and credit, they still require the services of traditional banks to help facilitate this.
Yet currently bigtech firms are only dipping their toes in financial waters, and the implications if they dive in could be profound. Most bigtechs have significant balance sheet strength and access to an extensive client base allowing them to bolster their core product offering with add-on financial services.
Bigtechs also often do not play by the same rules as incumbents - they challenge and at times ignore established workflows, in order to force tectonic shifts in business models. This creates a new trend in terms of how clients interact with the financial industry.
In the retail banking space bigtechs are already starting to provide financial services to clients, often wrapped within their more traditional business offering. Over 33 million users have made a purchase via a Pay with Amazon button. In Asia, China’s Ant Financial now has over one billion clients without a single bank branch. Alipay, the online payment platform of Ant Financial, conducts over a third of all Chinese electronic payments, while WeChat Pay, which falls under the Tencent umbrella, accounts for 15% of the same market.
This emergence of bigtech in financial services has not gone unnoticed by regulators as these new entrants bring numerous potential transformations for financial markets. While regulators are upbeat in terms of their plans for fostering further innovation in financial services through supporting new participants, they are also vigilant to potential risks driven by certain imbalances or gaps in the current regulatory frameworks applicable to bigtechs.
In general, the influence is seen as positive by the regulators, driving innovation and new solutions, with the impact on financial stability deemed to be negligible at present. Yet as bigtechs begin to play a larger role in the financial industry through provision of cloud services to banks or financial services to retail or corporate clients this assessment could rapidly change.
Some regulators have already voiced a number of emerging competition concerns and the need to provide guidance to firms on what constitutes pro-competitive data pooling and where a dominant firm could be expected to provide data access under some form of data portability.
By adding financial service provision to their more traditional product offerings, bigtech firms have had a noticeable impact on financial markets and gained market share. But while bigtechs may provide traditional banking services to clients in areas such as payments and lending, they have very distinct, and often unique, business models.
The data-network activities loop, which uniquely underpins bigtech’s business models, could potentially bring new risks for the users of their platforms and for the market more broadly. Concern centres on whether the current regulatory environment accounts for such business models or if there is a regulatory gap open to exploitation when it comes to competition and data protection. Clearly, such a gap would result in an uneven playing field in the financial markets playing out negatively for customers.
There is a risk that while bigtech firms could represent a source of increased competition for incumbent financial institutions, in some scenarios, their participation may not result in a more competitive market over the longer term, as evidenced in China where two firms account for 94% of the overall mobile payments market.
Regulators will need to understand whether current regulatory mechanisms are effective and armed with the tools that enable necessary safeguards against the potential risks posed by emerging business models. Yet given the complex and cross-sectoral nature of the new phenomenon, it will require efforts and collaborative work from different regulatory bodies.
This will require alignment between competition authorities, financial regulators and data protection supervisors, and altered policy in one area might have a knock-on effect elsewhere. The same goes for cross-border coordination, which is going to be another important focus given the global nature of many bigtech firms.
If innovation and competition are to be supported, there should be a well-balanced use of policy tools by regulators focused on these endeavours. While unleashing the upside of innovation, regulators will also have the downside firmly on their radar particularly the growing dependency between the financial market and new entrants, with cloud services being watched the closest.
Given the increasing concern that the supply of these services will be concentrated with just a few large cloud providers, issues surrounding financial stability and the potential development of a new single point of failure will lead the discussion.
There are numerous ways in which the growing presence of new entrants in the financial industry will play out. As the picture continues to take shape, the regulators’ vigilance will grow, paying close attention to the impacts these developments would have on financial stability, competition and clients’ protection.
But no matter how this all unfolds, the focus of the financial industry will remain on clients and ensuring that banking products maintain pace with innovation and the evolving, often demanding client expectations. Clients will therefore be the ultimate winners.
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12 Sep 2019